Market Leadership

I received an email from my friends Seth Hamed and Barry Bannister at Stifel yesterday. They had done an analysis of S&P 500 returns to see just how much the top performers have contributed to total index performance this year. I wanted to do a similar analysis myself to see if I could come up with similar results. So I ran the returns (not including dividends) for all 500 components of the index and then sorted the stocks by return, highest to lowest. The table below summarizes the data. You will see listed among the Top 20 performers many familiar names. The list includes several of the market darlings that have helped the market stay positive this year despite heavy losses in individual stocks and sectors. Narrowly missing the Top 20 were other investor favorites such as Facebook and Under Armour.

Here are of the conclusions we can draw:

Despite comprising only 4% of the total companies in the S&P 500, these Top 20 performers collectively represent about 7% of the total current S&P 500 market cap. Another way to say this is that the Top 20 performers, on average, are almost double the average size of the bottom 480. This makes them almost doubly important to the overall index performance. (This should be remembered if and when some of these names start to fall out of favor!)

The average year-to-date return (not including dividends) for the Top 20 performers was +59% compared to -3% for the bottom 480.

Therefore, the Top 20 performers brought the overall S&P 500 return up from -3% for the bottom 480 to +1% for the S&P 500 as a whole – a contribution of about 4%.

We arrived at the same result when we weighted the Top 20 returns by market cap – the Top 20 contributed about 4% to the total index return.

Why is this analysis important? Because it demonstrates the lack of breadth in the market right now. Overall index returns are being driven by a select few, and relatively large, index components. In fact, the S&P 500 would be down year-to-date, and significantly so, if it weren’t for the contributions from these few stocks. Market tacticians generally interpret low market breadth as a potential warning sign. In other words, as market leadership gets smaller and smaller, it could be a harbinger of broader market weakness.

This analysis is just one of the many pieces to the puzzle as we approach a new year. Our proclivity is to remain defensive as we undergo the unwinding of an unprecedented period of monetary stimulus worldwide.

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